The nine-month financial results of heavyweight Greek banks did not please the investment community. Banks posted a 12-percent year-on-year drop in earnings at the pretax and after minority level, dragging all listed companies’ profits down 5 percent. If it were not for the banks, total profits would have been flat. Once again, healthy net interest income growth helped alleviate a sharp decline in commission and trading income. With this year ending in less than a month, market participants will have to start thinking about next year’s bank profits. Will they recover or disappoint as they did this year? The general picture emerging from this year’s results is more or less the same. Greek banks managed to post satisfactory next interest income growth, sometimes higher than expected, on the back of a widening interest rate spread and healthy loan growth, but their earnings suffered from a sharp drop in commission and trading income on the back of a weak domestic stock exchange. On the cost front, there were differences as some banks managed to control their costs, while others were less successful. The National Bank of Greece saw its pretax and after minority earnings drop 7.5 percent year-on-year to 570 million euros in the first nine months of this year on the heels of a 31 percent rise in net interest income to 841 million euros. Its net interest margin widened to 2.28 percent from 1.76 percent in the same period in 2000. On the other hand, commission income fell 12 percent to 253 million euros and earnings from equities, bond and foreign exchange trading dropped 39 percent to 253 million euros despite a 87.4 percent rise in income from bond trading. On the cost side, operating expenses went up to 842 million euros, registering a 6-percent rise. EFG Eurobank-Ergasias reported a 6.5 percent rise in after tax and minorities earnings to 173.4 million euros (under International Accounting Standards) on the back of a 25 percent rise in net interest income to 443,7 million euros. Its net interest margin stood at 3.10 percent compared to 3.18 percent in the same period in 2000. EFG Eurobank Ergasias’s earnings, however, benefited from lower loan and income tax provisions. Operating expenses grew 10.2 percent, adversely affected by a 28.8-percent rise in depreciation expenses. Piraeus Bank saw its nine-month pretax after minorities profit fall 16.6 percent year-on-year to 78.3 million euros with net interest income growing 25 percent. Net income from commission fell 50 percent, while personnel and administrative expenses eased 5.6 percent and 4.6 percent year-on-year respectively in the first nine months of 2001. Greek banks have managed to take advantage of interest rate cuts engineered by the European Central Bank (ECB) this year to widen the gap separating rates charged on deposits and loans to their benefit. This, along with an improving asset mix, explains to a large degree their usually larger net interest margins. Although most pundits expect ECB to continue to cut interest rates in the first quarter of 2002 in order to stimulate the sluggish economy of the eurozone and avert an outright recession, it is doubtful whether there is much room left, if any, for Greek banks to capitalize like they did in 2001. Competition among banks for high margin loans such as consumer, mortgages and small and medium enterprises may also pose a threat, but this is not likely to happen before the loan-to-GDP ratio reaches much higher levels. Loan growth should continue at a healthy clip, although lower than that of 2001, therefore boosting their net interest income. Greece’s loan-to-GDP ratio is still low, around 45 percent, compared to the average ratio in the eurozone and it is reasonable to expect that this will almost double in a few years time, as low interest rates kick in. Of course, an economic slowdown or recession will take some steam out of it but this is not projected for Greece in the next few years. All-told, net interest income should continue to grow next year although at a lower rate. On the bright side, commission income and trading income, the two sources of weakness for banks in the last couple of years, may recover in 2002, especially if stock market market conditions improve. There are already some encouraging signs from third-quarter figures that the sharp decline is over, but the huge sums of money made by a few large banks on bond trading this year may make comparisons less favorable than they would have been next year. Cost is an unknown factor. Some banks will continue to be hampered by merger and depreciation expenses next year and so it is difficult to gauge the exact impact. It is known that Greek banks will have to continue to spend heavily on IT and other forms of investment to upgrade their systems and raise their personnel’s expertise and standards, and this does not bode well for total costs. On the positive side, they know how important cost control is and have said they will their best to rein in expenses. What does it all mean for profitability? Although banks significantly differ from one another, it looks as if all share the same destiny with some exceptions. Net interest income will continue to grow next year but at a much slower pace, and commission and trading income may be slightly up or down, depending on the bourse. Therefore, each bank’s success or failure to control costs will have a direct, large impact on their profits.